Mitt Romney’s economics: Work in progress
The presumptive nominee is steering his economic policies to the right
Apr 21st 2012 | WASHINGTON, DC | from the print edition
[Greg Ip] WHEN Paul Ryan released his proposed federal budget a year ago, Mitt Romney greeted it coolly. He congratulated the House Budget Committee chairman for “setting the right tone”, but pointedly declined to endorse any of its details.
The coolness was understandable. Mr Ryan’s budget was political dynamite. It proposed to slash income-tax rates, especially for the rich and businesses, and replace traditional Medicare with vouchers for the elderly to buy health insurance. Conservatives loved it, but voters, once they saw the details, recoiled, as did some Republicans. Newt Gingrich, vying with Mr Romney for the party’s presidential nomination, called it “right-wing social engineering”. When Mr Romney released his own 160-page economic platform last September, it promised much more limited tax cuts. On Medicare, all he promised was a plan that would “differ” from Mr Ryan’s while sharing its objectives.
Over the next few months, though, Mr Romney steadily warmed to Mr Ryan’s plan as he faced a series of rivals from his political right. By December he was attacking Mr Gingrich for criticising it, and this past February he released a new tax plan of his own that slashed all personal tax rates by 20%. And when Mr Ryan produced a new, very similar, version of his budget on March 20th for next fiscal year, Mr Romney was effusive. “It`s a bold and exciting effort,” the front-runner for the Republican presidential nomination declared. It would be “marvellous”, he said, if the Senate passed it.
The rightward drift of Mr Romney has taken him a long way from where he started. His 2010 book, “No Apology”, reads more like a McKinsey report than a memoir (in fact, it regularly quotes McKinsey, a consultancy). It ranges from the business practices of Japanese doctors to how much profit Comcast, a cable company, invests. Leaf through it and last September’s policy platform with its 59 specific proposals, and you will encounter sober discussion of ways to deal with greenhouse gases, international trade and retraining.
What you will not find is the conservative red meat that has been a staple of other Republicans’ campaigns. Rather than dismantling the hated Environmental Protection Agency, Mr Romney simply says that it should take more account of costs before passing rules and give businesses more time to comply. Whereas rivals called for abolishing the National Labour Relations Board because of its pro-union decisions, Mr Romney merely promised to staff it with “experienced and even-handed arbiters”.
Such sobriety is to be expected from a data-driven businessman uncomfortable with the ideologues of his party. And he also seems acutely aware that, once in office, he is expected to do what he has promised. Mr Romney wants all his proposals to be “actionable”, says Lanhee Chen, his campaign policy director (meaning, in this case, “capable of being acted on”). “The best campaign policy is the best policy for governing. How can you set up policies that put you in a position to govern on day one?”
That pragmatism is reflected in his economics team. His two main outside advisers are Glenn Hubbard, the dean of Columbia University’s business school, and Greg Mankiw, a Harvard economist and author of bestselling textbooks. Both served as chairman of George W. Bush’s Council of Economic Advisers; neither is a fire-breathing conservative, having advocated policies anathema to the right such as cheap government-backed mortgage refinancing (Mr Hubbard) and higher petrol taxes to counter global warming (Mr Mankiw). Vin Weber, a former congressman who is now a prominent political consultant and lobbyist, and Jim Talent, a former senator from Missouri, also help on domestic policy. Other outside experts weigh in on more specialised topics, and their names will probably be announced as policy details are filled in.
Mr Romney’s full-time team of policy wonks camps out at his campaign headquarters in a nondescript building in the North End of Boston, whose only outside markings are for an interior-decorating business; a far cry from Barack Obama’s swish premises in Chicago. Mr Chen, a health-care expert, worked on Mr Romney’s campaign in 2008 and George Bush’s in 2004. Assisting him on domestic-policy issues is Oren Cass, a former consultant for Bain & Company, where Mr Romney once worked.
The team keeps Mr Romney briefed with memos, e-mails and PowerPoints on topics of the day. Actual policy proposals usually start with Mr Romney himself. Periodically his advisers come up with ways to turn his preferences into a concrete proposal, such as “paycheque protection”, which would bar unions from automatically deducting dues used for political purposes from members’ pay.
Not all Mr Romney’s positions are obviously conservative: in a break from Republican orthodoxy, he promises to get tough with China by designating it a currency manipulator on his first day in office. Designation, by itself, is relatively innocuous, only obliging the administration to negotiate. As a symbol, however, it would jeopardise what is fast becoming the most important bilateral relationship in the world.
For the most part, though, Mr Romney has been tugged to the right. As his opponents called for the head of Ben Bernanke, the Federal Reserve chairman, Mr Romney joined in, saying he would not reappoint him—an odd way to treat someone who has done what Mr Romney says the Fed should do, namely keep inflation near 2%.
By far the most important question is over fiscal policy. Less than two months after the election, Mr Bush’s tax cuts and Mr Obama’s temporary payroll-tax cut will expire, while savage cuts to defence and other domestic spending will automatically kick in, thanks to the deal that raised the debt ceiling last August and the failure of a congressional committee to come up with an alternative. The combined fiscal effect would be worth 3.5%-5% of GDP, enough to tip the economy back into recession. As a result, Democrats and Republicans agree that an alternative must be found.
Mr Romney’s original tax proposals were narrowly crafted to boost investment: cut the corporate income-tax rate from 35% to 25%, end taxes on companies’ foreign earnings, and eliminate taxes on capital gains and dividends for those earning less than $200,000 a year. On personal taxes he promised only to preserve Mr Bush’s tax cuts (which would keep the top rate at 35% rather than returning it to 39.6%), while murmuring that one day broader reform, involving lower rates and a broader base, might follow.
But those proposals increasingly looked timid next to the heftier, and more irresponsible, tax cuts his rivals rushed to embrace. Rick Perry, governor of Texas, promised to cut the top rate to 20%; Mr Gingrich, former Speaker of the House of Representatives, would slash it to 15%, and Herman Cain talked of 9%.
Campaign advisers say Mr Romney had always planned to release a more detailed personal-income-tax proposal; the only question was timing. Still, by responding when he was under so much pressure from the right, he sacrificed the rigour and realism of his original platform. His new plan would cut all personal rates by a fifth, slicing the top rate to 28%.
Mr Romney claims that this plan would be neutral in terms of both revenue and distribution, meaning it would not change the level of tax take or the relative position of rich and poor. That is hard to believe. The Tax Policy Centre, a research group, reckons Mr Romney’s original plan would have added $180 billion to the deficit in 2015, while the new one adds a whopping $500 billion. The Committee for a Responsible Federal Budget, giving Mr Romney some credit for his promised spending cuts, says his plan would send the national debt up to 96% of GDP by 2021 from 73% this year; it would reach only 76% under Mr Obama’s latest budget. Neither group gives Mr Romney credit for his promise to pay for the cuts by closing loopholes, because he has specified none, though he has reportedly told donors he might eliminate deductions for rich people’s second mortgages and for state and local taxes.
Still, it would be difficult to pay for all his tax cuts simply by closing loopholes for the affluent. Mr Romney has said his tax cuts would partly pay for themselves by generating stronger economic growth, an assumption which budget experts routinely ignore when pricing fiscal plans.
His plan would also be extremely generous to the rich. Their after-tax pay would rise most because they would pay income tax at a much lower rate, and because they own most of the shares that benefit from a lower corporate rate. And the one loophole that Mr Romney has promised to preserve, the preferential rate on capital gains and dividends, is hugely beneficial to the wealthy, including himself.
Mr Romney has promised to cut federal spending to below 20% of GDP by the end of his first term, in 2017. That would be hard: the Congressional Budget Office reckons it is heading towards 22%, an estimate that incorporates agreed cuts in discretionary spending (a category that includes education, science and law enforcement, for example), and defence. Mr Romney has also promised to keep national defence spending at 4% of GDP, 50% more than the level it is heading for, even without the automatic cuts scheduled for January. That means he must shrink entitlements and other discretionary spending even more.
To his credit, Mr Romney is one of the few candidates to advance plausible proposals for restraining the growth of entitlements, such as raising the eligibility age for Social Security (pensions) and Medicare (health care for the elderly). He has also embraced Mr Ryan’s proposal that, starting in 2022, new Medicare beneficiaries should receive a voucher for a private plan. They could instead choose traditional Medicare, but its value would be capped at that of the voucher. The plan could save money but, critics say, could also leave traditional Medicare burdened with the sickest patients and inadequate funds for treating them. Like Mr Ryan, Mr Romney would convert the federal contribution to Medicaid, the federal-state health plan for the poor, from matching payments to block grants for the states. The resulting savings depend crucially on how fast the block payment would grow; Mr Ryan would hold it to much less than the historical rate of health-care inflation.
Mr Romney may want to tack away from these proposals over the course of the campaign in an effort to woo centrist voters. But having so prominently embraced Mr Ryan, it will be difficult for him to let go; and in any case, it may not matter. On fiscal policy, it is Mr Ryan, not Mr Romney, who guides the party’s agenda, in a way no legislator has since Jack Kemp, a backbench congressman, came up with supply-side economics in the 1970s as the party’s route back to the White House. As Grover Norquist, an anti-tax campaigner, puts it, “We don’t need a president to tell us in what direction to go. We know what direction to go. We want the Ryan budget. We…just need a president to sign this stuff.”
The original article is linked here.